1. SAYRE | MORRIS Seventh Edition Monopoly CHAPTER 10 10-1© 2012 McGraw-Hill Ryerson Limited

2. Learning Objectives: Monopoly LO1: Define a monopoly, explain how they come into existence and why they must reduce their prices to sell more LO2: Understand how the profit-maximizing output and price are determined for a monopolist LO3: Explain five grounds on which monopolies can be criticized LO4: Explain the significant difference between monopoly and perfect competition CHAPTER 10 10-2© 2012 McGraw-Hill Ryerson Limited

3. Learning Objectives: Monopoly LO5: Explain three grounds on which monopolies can be defended LO6: Discuss ways that governments can change the behaviour of monopolies CHAPTER 10 10-3© 2012 McGraw-Hill Ryerson Limited

4. Monopoly a market in which a single firm (the monopolist) is the sole producer protected from new competitors by barriers to entry Barriers to Entry obstacles that make it difficult for new participants to enter a market 10-4© 2012 McGraw-Hill Ryerson Limited LO1 Monopoly

5. 1.technical barriers such as sole ownership of a resource 2.legal barriers such as public franchise, licences, patents, and copyrights 3.economic barriers caused by economies of scale 10-5© 2012 McGraw-Hill Ryerson Limited LO1 Barriers to Entry

6. Self-Test 10-6© 2012 McGraw-Hill Ryerson Limited Entry into the following industries is very difficult. What type of barrier to entry is involved? a)Computer operating systems b)Commercial aircraft manufacturing c)West coast wild salmon fishing LO1

7. Self-Test 10-7© 2012 McGraw-Hill Ryerson Limited Entry into the following industries is very difficult. What type of barrier to entry is involved? a)Computer operating systems b)Commercial aircraft manufacturing c)West coast wild salmon fishing LO1 technical barrier (sole ownership of a resource) economic barrier (economies of scale) legal barrier (licence fee required)

8. able to set price rather than having to accept the market-determined price can set either price or quantity sold, but not both since the monopolist is the industry, it faces the market demand for the product demand is a downward-sloping curve must decrease the price in order to sell more 10-8© 2012 McGraw-Hill Ryerson Limited LO1 Monopoly

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10. 10-10© 2012 McGraw-Hill Ryerson Limited LO1 In order to increase sales, a monopolist is forced to reduce price not just on the last units sold, but on the whole of its output

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12. Total revenue is maximized when the marginal revenue is zero a monopolist will produce only where the demand is elastic 10-12© 2012 McGraw-Hill Ryerson Limited LO1 Monopoly

13. Self-Test 10-13© 2012 McGraw-Hill Ryerson Limited Suppose a monopolist was charging a price of $50 for its product and was selling 15 units. It has now lowered its price to $48 and is selling 16 units. What is the marginal revenue? What is the price elasticity of demand over this price range? LO1

14. Self-Test 10-14© 2012 McGraw-Hill Ryerson Limited Suppose a monopolist was charging a price of $50 for its product and was selling 15 units. It has now lowered its price to $48 and is selling 16 units. What is the marginal revenue? What is the price elasticity of demand over this price range? LO1 Marginal revenue: $18. Total revenue at a price of $50 is $750 (15 x $50). Total revenue at a price of $48 is $768 (16 x $48) The extra unit produces extra total revenue of $18 ($768 – $750). Elasticity: e = % D Q= 1/15.5 x 100 = 6.5% = 1.59 % D P 2/49 x 100 4.1

15. Total Revenue Approach maximum profit is where the difference between total revenue (TR) and total cost (TC) is greatest the maximum profit point is shown on the total profit curve, where it occurs at the highest point. the maximum profit point also occurs where the slope of TR (same as MR) equals the slope of TC (same as MC) the break-even points occur where total revenue and cost are the same 10-15© 2012 McGraw-Hill Ryerson Limited LO2 Maximizing Profit

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18. Marginal Revenue Approach profits are maximized (or losses minimized) at an output where MR  MC same profit maximization rule as perfectly competitive firms 10-18© 2012 McGraw-Hill Ryerson Limited LO2 Maximizing Profit

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21. monopolists are not always profitable depends on costs – if AC curve is higher than the demand curve at all output levels, will have a loss Can minimize loss using the profit maximization rule 10-21© 2012 McGraw-Hill Ryerson Limited LO2 Minimizing Loss

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23. Self-Test 10-23© 2012 McGraw-Hill Ryerson Limited Complete the following table and indicate the break-even outputs and the profit maximizing output: LO2 QuantityPrice (=AR) Total Revenue (TR) Total Costs (TC) Total Profit (Tπ) 20$100$2060 21982080 22962112 23942142 24922177 25902216 26882257 27862322 28842417 29822530

24. Self-Test 10-24© 2012 McGraw-Hill Ryerson Limited Complete the following table and indicate the break-even outputs and the profit maximizing output: LO2 Break-even (TR=TC) occur at 22 and 27. Profit-maximizing output occurs at an output of 25 QuantityPrice (=AR) Total Revenue (TR) Total Costs (TC) Total Profit (Tπ) 20$1002 000$2060 ‑ 60 21982 0582080 ‑ 22 22962 112 0 23942 162214220 24922 208217731 25902 250221634 26882 288225731 27862 322 0 28842 3522417 ‑ 65 29822 3782530 ‑ 152

25. 1.able to make economic profits indefinitely 2.are both productively and allocatively inefficient 3.produce less and charge a higher price than a competitive industry 4.creating a more unequal distribution of income and wealth within society 5.using their power to practice price discrimination 10-25© 2012 McGraw-Hill Ryerson Limited LO3 Criticisms of Monopolies

26. Self-Test 10-26© 2012 McGraw-Hill Ryerson Limited The following table shows the demand for haircuts: a) If this was a single-price barber, what would be the total revenue for six haircuts? b) If this barber was able to practice perfect price discrimination by charging each customer the maximum they would pay, what would be the total revenue for six haircuts? LO3 PriceQuantity $201 192 183 174 165 156

27. Self-Test 10-27© 2012 McGraw-Hill Ryerson Limited The following table shows the demand for haircuts: a) If this was a single-price barber, what would be the total revenue for six haircuts? b) If this barber was able to practice perfect price discrimination by charging each customer the maximum they would pay, what would be the total revenue for six haircuts? LO3 TR $90 ($15 x 6) PriceQuantity $201 192 183 174 165 156 TR $105 ($20 + $19 + $18 + $17 + $16 + $15)

28. Monopolies charge higher prices than perfectly competitive firms. Monopolies produce lower outputs than perfectly competitive firms and these outputs are below economic capacity. Monopolies, unlike perfectly competitive firms, may make economic profits in the short run and in the long run. 10-28© 2012 McGraw-Hill Ryerson Limited LO4 Perfect Competition v Monopoly

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31. Self-Test 10-31© 2012 McGraw-Hill Ryerson Limited a) If the graph opposite depicts a competitive market, what is the equilibrium price and quantity? b) If the graph opposite depicts a monopolist, what is the equilibrium price and quantity? LO4

32. Self-Test 10-32© 2012 McGraw-Hill Ryerson Limited a) If the graph opposite depicts a competitive market, what is the equilibrium price and quantity? b) If the graph opposite depicts a monopolist, what is the equilibrium price and quantity? LO4 Price: $30; Quantity: 300 Price: $40; Quantity: 200

33. 1.They capture large economies of scale in production. 2.They engage in extensive research and development into new techniques of production and new products. 3.They attract high-quality staff by offering relatively high wages and good working conditions. 10-33© 2012 McGraw-Hill Ryerson Limited LO5 Defence of Monopolies

34. single producer who is able to produce at a lower cost than competing firms could usually in a market with large economies of scale 10-34© 2012 McGraw-Hill Ryerson Limited LO5 Natural Monopoly

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36. goods or services regarded as essential and therefore usually provided by government competition may well be costly and wasteful 10-36© 2012 McGraw-Hill Ryerson Limited LO5 Public Utilities

37. Self-Test 10-37© 2012 McGraw-Hill Ryerson Limited In Figure 10.9 opposite, suppose there are two competing rail companies, each with 50 % of the market. What would be the profit or loss for each if they both charged $1.50? LO5

38. Self-Test 10-38© 2012 McGraw-Hill Ryerson Limited In Figure 10.9 opposite, suppose there are two competing rail companies, each with 50 % of the market. What would be the profit or loss for each if they both charged $1.50? LO5 At $1.50 the quantity demanded is 100 000, or 50 000 each. The average cost of servicing 50 000 riders is $2.50. This means that each company would lose $1.00 for each fare, for a total loss of $50 000 per day.

39. Some options: Taxing the monopolist Government price setting Nationalization 10-39© 2012 McGraw-Hill Ryerson Limited LO6 Government Control

40. Lump sum Profits Tax: affects fixed cost but not variable cost increases average cost but marginal cost is unaffected output and price levels are unaffected lower profit (due to higher costs) 10-40© 2012 McGraw-Hill Ryerson Limited LO6 Taxing the Monopolist

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42. Monopoly Sales Tax: tax on each unit sold increases marginal cost profit maximizing point shifts part of the tax is shifted to consumer in the form of higher price lower quantity is produced monopolist’s profit is reduced 10-42© 2012 McGraw-Hill Ryerson Limited LO6 Taxing the Monopolist

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44. Socially Optimum Price the price that produces the best allocation of products (and therefore resources) from society’s point of view, that is, P  MC Fair-Return Price a price that guarantees that the firm will earn normal profits only, that is, where P  AC 10-44© 2012 McGraw-Hill Ryerson Limited LO6 Government Price Setting

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46. Self-Test 10-46© 2012 McGraw-Hill Ryerson Limited On the graph, indicate: a) Price (P UM ) and quantity (Q UM ) if monopolist is unregulated b) Price (P SO ) and quantity (Q SO ) if monopolist charges the socially optimum price c) Price (P FR ) and quantity (Q FR ) if monopolist charges fair-return price LO6

47. Self-Test 10-47© 2012 McGraw-Hill Ryerson Limited On the graph, indicate: a) Price (P UM ) and quantity (Q UM ) if monopolist is unregulated b) Price (P SO ) and quantity (Q SO ) if monopolist charges the socially optimum price c) Price (P FR ) and quantity (Q FR ) if monopolist charges fair-return price LO6

48. © 2012 McGraw-Hill Ryerson Limited10-48 Types of barriers to entry Profit maximization for a monopolist Criticisms of monopolies Defences of monopolies Ways that governments can control monopolies Chapter 10 Summary